The two largest US mortgage lenders are turning up the heat on their smaller competitors, offering discounts and other incentives to win market share as rising interest rates have slowed homebuying activity.
The aggressive strategies pursued by Rocket Mortgage and United Wholesale Mortgage, the largest and second-largest US mortgage originators, respectively, come as many lenders are pulling back from the market or going out of business.
Rocket is promising homebuyers it will waive closing, appraisal and other refinancing fees if they obtain a new mortgage and interest rates drop within a three-year period starting from July.
UWM, which specialises in serving independent mortgage brokers, said in June it would lower interest rates on its loan products by 50 to 100 basis points to help brokers win more business.*
Rocket chief executive Jay Farner said this month he saw an opportunity to “lean in” as competitors retreat, and his counterpart at UWM struck a similar tone during its second-quarter earnings presentation.
“We are being very aggressive in this environment,” UWM chief executive Mat Ishbia said. “I’m not really focused on the margins . . . it’s an investment for the long term.”
The US housing market has been rocked by the steepest and fastest increase in interest rate in over 50 years. The average 30-year fixed rate mortgage jumped from 3.2 per cent at the beginning of the year to nearly 6 per cent in June and 5.55 per cent last week.
The rising rates combined with historically high house prices have pushed many borrowers out of the market. Average new mortgage applications dropped 1.2 per cent in the week ending August 19 and remained near a 22-year low, according to the most recent data from the Mortgage Bankers Association.
Compared with one year ago, refinancing applications declined 83 per cent and purchase applications dropped 21 per cent.
Independent mortgage lenders and mortgage subsidiaries of banks reported a net loss of $82 on each loan they sold in the second quarter to be packaged into securities, according to the MBA. In the first quarter, lenders saw an average gain of $223 per loan.
Sprout Mortgage has ceased operations and First Guaranty Mortgage has filed for bankruptcy. Wells Fargo, formerly the largest US mortgage originator, said last month its mortgage business would “naturally come down over time”. Santander said in February it was exiting the US mortgage market and signed a deal in July under which Rocket would originate mortgages for its customers.
“Pulling out a profit in these difficult conditions is no easy feat,” said Marina Walsh, MBA’s vice-president of Industry Analysis.
Analysts said the moves by the two largest US mortgage lenders would increase pressure on smaller originators, and noted that UWM was being more aggressive than Rocket.
“UWMC is going for the jugular with the latest pricing adjustments,” said Jefferies analyst Kyle Joseph. “The aggressive pricing strategy is to gain share as competitors are already struggling.”
Two months after UWM announced its “Game On” pricing initiative, LoanDepot, its second-largest rival in the business of underwriting mortgages for independent brokers, said it was quitting the wholesale business as it reported widening losses in the second quarter.
“It’s safe to say the industry competition is driving [LoanDepot’s decision] and UWMC is the main driver of competition in the broker channel, which LDI is exiting,” said KBW analyst Bose George.
Many lenders have responded with lay-offs, including Better.com, which has let go of more than a third of its staff this year. Rocket offered 8 per cent of its staff a voluntary buyout this year but has pledged to avoid lay-offs.
“It wouldn’t make a lot of sense for us to go through a significant capacity reduction only to turn around and hire again four or five months later,” said Farner.
Joseph, the Jefferies analyst, said both Rocket and UWM “have relatively strong capital structures so over the intermediate term we don’t consider it a material risk” for the companies to put pressure on their competitors.
Both companies primarily underwrite conventional mortgages, which are easier to securitise, but if capital market dislocation persists longer term it could weigh on margins, Joseph added.
*This story has been amended to clarify who UWM specialises in working with